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How Should Funders Evaluate Charities?

The three powerhouses, Guidestar, Charity Navigator, and Better Business Bureau, that foundations, philanthropists, and donors use to seek out information and ratings about nonprofits released an open letter to the nonprofit and foundation world yesterday. They stated that donors should not measure a charity’s performance based on overhead expenses. The letter hosted on the website www.overheadmyth.com comes on the heels of Dan Pallotta’s TED Talk and Keynote at NTC13, which sharply criticized funders and nonprofit rating service providers for penalizing nonprofits who spent what they considered too much money on administrative expenses, such as salaries, training, and benefits. Pallotta asked how the nonprofit sector can ever expect to compete with the corporate sector for talented leaders when nonprofits can’t pay decent salaries and benefits. This is a topic that Amy Sample Ward and I also discuss in our book Social Change Anytime Everywhere in the chapter on Disrupting the Nonprofit Sector.

In the letter, the three ratings companies recommend that donors measure a charity’s performance in transparency, governance, leadership, and results. When I’m evaluating a charity for a client who is looking to make a significant donation to a nonprofit, I measure 4 key things:

1. How effective is that organization in creating real world social change? For example, if they are a local soup kitchen, how many people are they feeding every day? Do they offer job training and housing assistance for people in transition? If they are an advocacy organization, are they moving the needle around the issue they are advocating?

2. What kind of results is the organization generating? Using the example of the local soup kitchen, how many people in their job training programs are graduating and are obtaining jobs? How many of the graduates do they continue to have a relationship with? How many people who have benefited from their services come back and volunteer? These are just a few examples of data I would research to analyze their results.

3. How transparent is the organization with their data and findings? Transparency, while important, has become a big buzz word in the nonprofit community and marketing world. Every organization and the people who run them claim that they are transparent. But are they? How transparent are they with their financial data as well as their program successes and failures?

4. Do the organizations test and experiment in order to meet their mission? There is no formula to meeting your mission and creating social change. It takes testing, experimenting, and iterating to see what works and what clearly doesn’t work.

I think nonprofits are generally very creative, but many of them are risk-averse. On some levels I understand where they are coming from. Nonprofits have to answer to funders, a Board of Directors, their members, and donors; all of whom want to see the organization succeed. Organizations also fear being penalized by some of the ratings services. They are afraid that if they spend any money “the wrong way” or too much on certain expenses, they will be reprimanded. However, the nonprofit sector needs to move past these fears if they are going to truly meet their missions. The nonprofit community must take risks, test new ideas, and fail quickly to succeed.

So when does reviewing overhead become important? Reviewing this data can be helpful at times in ensuring charity accountability. “At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management," the letter stated.

In a recent blog post by Craig Newmark, of craigslist and craigconnects, he highlighted a report by the Center for Investigative Reporting that looked at overhead and found that some charities are raising millions of dollars but barely spending any money on the people they serve.

It's real life situations like this that exemplify why you actually do need to look at overhead and the other data I mentioned earlier in the blog post, to find those charities who aren't doing their job, and support those who are.

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Allyson has been named one of the "Most Influential Women in Tech" by Fast Company, a "Tech Titan" by the Washingtonian and "one of the top 30 women entrepreneurs to follow on Twitter" by Forbes for her leadership roles in technology and social media.